GCI 2016-2017: Results overview and 3 key messages

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Table 1 presents the rankings of the GCI 2016–2017. Many of the competitiveness challenges we see today stem from the aftermath of the financial crisis. Today, productivity and growth are not picking up in advanced economies, and the consequences of low and even negative productivity growth in many emerging economies are now evident. The great recession led many advanced economies to implement very loose monetary policy, which in turn fueled a global commodities boom (Box 3) that masked many of the competitiveness challenges of commodity-exporting emerging markets. Vulnerability to commodity price fluctuations in emerging economies and the promises of the Fourth Industrial Revolution underscore the importance of innovation as a source of competitiveness and economic diversification to reignite growth.

Against this background, it is clear that (1) monetary stimulus is not enough to reignite growth if economies are not competitive, (2) an increasingly important element of competitiveness is creating an enabling environment for innovation, and (3) innovation in turn goes hand in hand with openness and economic integration.

Monetary policy is not enough: Insufficient competitiveness is a constraint for reigniting growth worldwide

In the aftermath of the 2007–2009 financial crisis, many central banks and governments have resorted to monetary policy to try to jumpstart growth. However, near-zero or negative real interest rates have left little further scope for traditional monetary policy, and quantitative easing—the process of buying assets and increasing the size of central bank balance sheets—has delivered mixed results in spurring growth.

Figure 2 shows how economies that perform poorly in the GCI have seen their central banks boost their balance sheets more than better-performing economies, and yet those with higher competitiveness have recovered faster from the financial crisis and ensuing recession, achieving faster growth rates. The fact that monetary stimulus has been more effective and growth has been higher in more competitive economies, regardless of fiscal policies followed, suggests that the constraints may be on the supply side. Improving the conditions for businesses to flourish and increase their productivity is therefore the main policy challenge for advanced and emerging economies alike.

At the dawn of the Fourth Industrial Revolution era, technology and innovation are increasingly driving development

As a new wave of technological convergence and digitalization materializes in the Fourth Industrial Revolution, innovation and business sophistication, understood as the process of creating new products and services and finding new ways to produce things, are becoming increasingly important.

Innovation and business sophistication are more closely associated with income levels in general, and in emerging economies and commodity-exporting economies in particular, than they used to be. Figure 3 shows how, since 2010, for these two groups, GDP per capita has become more closely correlated with the GCI’s technological readiness, business sophistication, and innovation pillars than it is with the infrastructure, health and primary education, and market-related pillars (goods markets efficiency, financial market development, and labor market efficiency). These results illustrate how sources of productivity within firms and production units that are related to their ability to incorporate new technologies into their production processes, and that change the ways in which those firms and units perform tasks, are playing a larger role than investment in basic physical and human capital and well-functioning factor and goods markets, frequently thought to be sufficient to reignite growth. It also shows how the price changes experienced since the end of the commodity cycle and faster technological change are creating incentives for firms and policymakers to engage in more innovative activities.

Declining openness is endangering future growth and prosperity

An open, trading economy generates incentives to innovate and invest in new technologies because firms are exposed to competition and new ideas and can benefit from the technology transfer that comes from imports and foreign investment. At the same time, firms can benefit from larger markets abroad.8 However, the benefits of openness are at risk: protectionist measures, especially non-tariff barriers, have increased and global trade has not recovered since the global trade slowdown following the financial crisis.9 Figure 4 illustrates that, according to GCI data, economies in all income groups have become less open since 2007, driven mainly by non-tariff barriers, including increased legal and normative requirements. Figure 5 shows that economies that are open to foreign competition (as measured by the foreign competition subpillar of the GCI) are also more innovative, suggesting the importance of openness for innovation. Box 4 explores the relationship between openness, innovation, and competitiveness in the context of cities’ development and their integration into global value chains.